The Hardstone Group

One headline today read “Toyota woes follow years of slipping quality. Giant automaker ramped up quickly to become world’s leader. The complacency that brought General Motors, Ford and Chrysler to their knees seems to have infected Toyota, too.”

What’s unique and worth pondering about Toyota’s case is that this Japanese automaker pioneered the most widely followed methodology for process optimization - Lean Production, or simply Lean. This methodology focuses on eliminating waste from a process and adding velocity at the same time. Most companies combine Lean with Six Sigma, which focuses on reduction in error rates, to achieve processes for both products and service, that are efficient in time and cost and are effective.

As a pioneer of Lean, one would expect Toyota as an organization to know that processes deteriorate over time. This is a redult of several factors that include business environment, technology, people, and industry participants. Keeping the processes performing at optimum levels requires periodic benchmarking and tuning. In its effort to grow aggressively, Toyota seems to have taken its eyes off the ball, so to speak. It seems to have neglected investing in its very processes that earned it its distinguishing reputation for quality. Hard dollar estimates of loss from the recalls to Toyota are current in the billions of dollars, not to mention many years it will take the automaker to recover from the softer damages to its reputation that would translate into hard dollars.

As business leaders and managers, we can learn a very basic but important lesson from this – “don’t forget to sharpen the saw”. Meaning that keeping and eye on and investing in the back office processes through which the cash flows of the business pass, is critical to the health of the business. Trying to save costs by not investing in these back office processes will sooner or later cost a lot more – even the business itself.

It’s tough out there, no doubt about it. For individuals and businesses alike, credit is scarce and cash is king. While this environment creates a unique growth opportunity for a few lucky people and businesses, for the rest of the majority it is a sink or swim situation. And that is swimming upstream in a raging river full of floating logs and killer crocodiles. Not a pretty picture.

Small and medium businesses are having a particularly tough time. However, understanding some fundamental facts and keeping an eye on certain metrics is the best chance these entities have to survive now and be poised for growth when the economy turns around. I want to review both in this post.

First, the fundamental facts. 1) The world economy is critically dependant on the economy of the United States. 2) The U.S. economy is 2/3rd’s based on the U.S. consumer. 3) The U.S. consumer has been squeezed financially for decades now and has been living on credit. 4) The world is not as willing to lend money to the U.S. consumers as it was before this financial crisis.

The combined effect of these facts is that the days of year-over-year, double-digit revenue growth for most established businesses are over, at least for the foreseeable future. With revenues constrained, the profits margins will be much more dependant on the operating efficiency of the businesses than before. Essentially, the days of “lazy management” are over. This means that it is time to get disciplined and organized about the middle portion of the Income Statement – the SG&A component. While the knee-jerk reaction of a lot of business leaders in the past in situations similar to this one has been to cut back on investments and expenditures across the board, this broad-stroke tactic will not work this time around. The reason has to do with the long-term nature of this downturn in revenue opportunities. When cash is bleeding due to inefficient operations, the business will hemorrhage before the economy turns around.

Survival in this financial crisis depends on two key components of the business: customer service and operational efficiency. Getting as much of the revenue dollar to the bottom line as possible is the key and making customers happy will earn their loyalty. Realizing this, one can see that this is not the time for cost cutting on anything that is customer service facing nor is it time to defer the initiatives that would deliver operational efficiency. Both are critical to survival and cannot be compromised without dire consequences.

While the performance metrics vary from industry to industry, all businesses can benefit from keeping a close eye on the following:

• Customer retention rates
• Cost per transaction in Accounts Payable
• Cost per transaction in Accounts Receivable
• Cash position forecast accuracy in Treasury

Insightful leaders of small and medium businesses understand the importance of “information transparency” in this age of global business. They know that not having an accurate, end-to-end view of their Customer-to-Cash (C2C) and Procure-to-Pay(P2P) pipeline is akin to driving fast along a curvy mountain road blindfolded. Leading organization in this class have been moving rapidly in the direction of digitizing their core financial back office processes including Accounts Payable, Accounts Receivable, Procurement, and Treasury Operations. The tremendous cost savings gained from the efficiency of state-of-the-art processes in the back office make this a no-brainer, and yet a vast majority of small and medium businesses have not taken the first step in this direction. I believe it is more due to a lack of “how to do it” than it is due to a lack of “why do it”. In the past, these process improvement and automation initiatives were capital investment intensive and took months and years to execute. Now with the Web-based technology solutions and lean implementation methodologies, the upfront investment is minimal and the time to implements has been reduced to weeks. In my experience with many such initiatives for clients, the payback period has always been less than a year and often as short as six months.

There is no reason on earth that a business that wants to survive and grow would ignore its financial back office. Not now, not in this financial crisis.